Question 3 Sam decided to sell his interior design business in Town to Betty. While reviewing a purchase agreement drafted by Sam, Betty insisted on a covenant by Sam not to compete with her in the interior design business in Town for a period of two years. In response, Sam drafted the following proposed language on the last page of the purchase agreement: Sam hereby agrees that he will not perform interior design services in Town for a period of two years. Betty said: That s fine. I don t want to have to compete with your ties to your former clients in Town. Sam told Betty that he would revise the purchase agreement accordingly. The following day, Sam sent Betty the original and one copy of the purchase agreement. Betty signed the original without reading it and returned it to Sam along with payment of the purchase price; she kept the copy. Sam never signed the purchase agreement. Six months later, Betty learned that Sam had recently undertaken four large interior design jobs for clients who lived in Town. When she complained, he explained that, although the clients lived in Town, the jobs were on properties located outside Town. She reviewed her copy of the purchase agreement and discovered that it did not contain a covenant by him not to compete. Sam had mistakenly sent her an unrevised version of the purchase agreement. 1. Does the purchase agreement contain a covenant by Sam not to compete? Discuss. 2. Is the purchase agreement enforceable? Discuss. 3. Assuming the purchase agreement contains a covenant by Sam not to compete and is enforceable, did Sam violate the covenant? Discuss. 31
Answer A to Question 3 Is the Non-compete clause incorporated into the agreement? This is a contract for services; therefore the common law applies. Does a contract exist? A contract formed through mutual assent supported by consideration. Mutual assent? Mutual assent is formed by offer and acceptance Offer made? An offer is made by manifesting an intent to be bound to the material terms. Sam drafted a purchase agreement; this is sufficient to show that he intended to be bound. However the terms were not acceptable as Betty insisted on the inclusion of a new term. Under common law the request for the addition of the term was a rejection. Sam then sent the proposed language for the non-compete covenant which Betty assented to. Sam then sent a contract to Betty which she signed. This is sufficient to be considered an offer as Sam intended to be bound by the terms of the purchase agreement Acceptance Made? Acceptance is manifesting assent to the terms of the offeror communicated in an effective means. Here it is clear that the offer was communicated in an effective way and that Betty clearly intended to be bound by the contract. 32
Supported by Consideration? Consideration is shown by a bargained-for exchange. In this case Sam was bargaining for money and Betty was bargaining for Sam's business. This contract is supported by consideration and mutual assent, correspondingly a contract was formed. Additional term Non-Compete clause Generally the offeror is the master of the offer, and in the final contract there was no mention of the non-compete clause. This would seem too indicate that the final contract did not contain the non-compete clause. There was no mention of an integration clause so the court will need to look at the contract to determine if it is a complete integration of the parties agreement. Parol Evidence admitted The parol evidence rule states that not prior or contemporaneous oral agreements could be admitted to vary the terms of a written contract. In this case the parol evidence rule would bar the admission of the evidence of the if the contract was deemed to be fully integrated. Full integration? The contract will be considered partially integrated assuming that the parties would have "normally" have been expected to leave things out. In this case the non-compete was the essential term that Betty was bargaining for. Because of that it would not normally have been left out. Because of this the court will likely rule that the contract was completely integrated. And it will bar the parol evidence of the compete clause. 33
Mutual Mistake? In all contracts there must be a meeting of the minds. If it can be shown that both Betty and Sam intended for the non-compete clause to be in the final draft of the agreement, the court may add that term to do justice using it's "blue pencil provision." In this case clearly Betty believed that the clause was included in the contract as she complained about Sam violating the clause. Sam too believed that the contract contained the clause; he argued the interpretation of the clause, not the clause's existence, Therefore the purchase agreement will contain a covenant by Sam, not to compete with Betty. Is the purchase agreement enforceable? To avoid the enforceability of the validly formed contract a defense would need to exist to its enforcement. Sam could assert the Statute of Frauds. Because this contract cannot be completed in 1 year from the time it was made (because it included the non-compete clause) the Statute of frauds would need to apply. The statute can be satisfied by Full or part performance (to the extent of the performance) as well as a signed writing against the party to be charged, or promissory estoppal. In this case Sam could argue that there is no writing that was signed by him; therefore the agreement cannot be charged against him. However there has been full performance on Betty's and she is able to enforce that contract to the extent she performed. Because she has fully performed, she may fully enforce the contract. Did Sam Violate the validly formed covenant? If Sam violated the contract he would be liable to Betty in breach. 34
Further Examination of Mutual Mistake Mutual mistake can be used to reform the contract (discussed supra). In this case the non-compete agreement was placed in the contract by the court according to the mutual mistake. The court can only exercise its blue pencil provision to the extent of the mistake. Here the merger clause was intended to be included in the contract; however Betty interpreted those terms differently than Sam. During the course of the negotiations Betty expressed that she wanted a non-compete clause in the contract. Sam acquiesced by drafting a clause that Betty agreed with and this agreement was evidenced by the signing of the contract when she thought that the contract contained the clause. Because of this the clause will be incorporated as it was written, and as Sam did not violate the written clause he will not be liable in Breach. 35
Answer B to Question 3 Betty v. Sam 1. Is there a covenant? Controlling Law The contract is for the sale of an interior design business. Thus, the sale is not for goods and will be governed by common law. Contract Formation Preliminary Negotiation Preliminary Negotiations are invitations to deal. The facts stipulate that Sam and Betty were reviewing a purchase agreement when Betty wanted a covenant added which included a non-compete clause. The time spent reviewing the agreement and discussions over the purchase of the business would be considered preliminary negotiations. Offer An offer is an outward manifestation of present contractual intent containing definite and certain terms communicated to the offeree. Definite and certain terms include quantity, time, interested parties, subject matter, and price. Betty will argue that when Sam sent Betty the original and one copy of the purchase agreement, he indicated his intent to be bound by the terms of the offer in selling his business to Betty. The offer stipulated Sam would sell his interior design business (quantity of one business and subject matter) to Betty (interested parties) for the contracted purchase price. The facts do not indicate a purchase price but the language 36
"payment of the purchase price" indicates the price was agreed upon prior to sending the payment. The time can also be inferred by the facts that the offer was sent the next day and Betty signed and returned payment immediately. The terms are definite and certain. Betty received the offer; thus it was communicated in writing. There is a valid offer. Acceptance Acceptance in an unequivocal assent to the terms of the offer. The facts stipulate that Betty returned the signed original agreement and returned it to Sam. There are no facts to indicate that she made any changes or additions; thus there was unequivocal assent to the terms of the offer. Valid acceptance exists. Consideration Consideration requires a bargained-for exchange which includes a legal detriment and benefit to both. The facts stipulate that Sam agreed to sell Betty his interior design business in exchange for Betty's promise to pay Sam. Betty incurs legal detriment by paying the purchase price and benefit by gaining ownership to the business. Sam incurs legal detriment by giving up ownership of his business and adhering to the non-compete clause. He gains a benefit by getting paid. Sam's promise to give Betty the business is valid consideration for Betty's promise to pay the purchase price. A valid contract exists. 37
Covenants A covenant is a promise to perform under the terms of the contract. Non-compete Clause Betty will argue that Sam drafted the proposed language "Sam hereby agrees that he will not perform interior design services in Town for a period of two years" which was an express promise not to compete with her. Sam will counter that the actual contract does not have the non-compete clause included and Betty s introduction of the evidence is barred by Parol Evidence. Parol Evidence Rule Any oral or written agreement made prior to or contemporaneous with the agreement cannot alter the terms of the contract. Sam will argue that the agreement whereby Sam would include the non-compete language alters the terms of the final contract which was signed because there is nothing in the agreement that says he cannot compete. Fully Integrated Contract A contract is fully integrated if it was intended to be the parties final expression. Sam will claim that the contract was intended to be the final expression because it was the last step after preliminary negotiations and Betty signed and returned it to him. Betty will counter that they did not make any expressions that the contract was to be the final statement and there is no merger clause. Thus, the contract is not fully integrated. 38
Exception: Mutual Mistake Parol Evidence will be admitted for the purpose of proving a mistake in the contract formation. Mutual mistake occurs when both parties are under a mistaken belief about a material term of the contract. Betty will argue that Sam mistakenly sent her an unrevised version of the purchase agreement and she did not notice the discrepancy. Further, Betty will argue that both she and Sam agreed to the revision of the agreement prior to final integration, thus it was intended to be included and they both were mistaken as to its location within the contract. Sam will counter that the mistake of sending the unrevised version was a unilateral mistake on Betty's part because she did not read the contract that he sent her. Thus, the mistake is not a defense. However, the parol evidence will likely be admitted to show the parties' intent at the time of contract. Exception: Ambiguity Parol evidence will be admitted where terms in the agreement can have multiple meanings and the court must determine the meaning of the term at the time of contracting. Betty will argue that Sam's statement that the jobs he took in town were "were on properties located outside Town" shows the verbiage in the covenant "Sam hereby agrees that he will not perform interior design services in Town for a period of two years" is ambiguous. Betty will claim that she told Sam she didn't want to compete with his "ties to your former clients in town" which referenced the clients, not the location of the service. 39
Sam will counter that the non-compete clause indicated he could not perform services in town and said nothing about servicing clients who had other properties outside of town as well. The courts will likely admit Parol Evidence to determine whether the intended agreement was in reference to the clients or the location. THE AGREEMENT DID CONTAIN A COVENANT. 2. Is the purchase agreement enforceable? Defense to Contract Formation: Statue of Frauds - Real Property Contracts for the purchase of real property must be in writing signed by the party to be charged. Sam will argue that his interior design business was an established business in town. It can be inferred that the business location was real property and Betty agreed to purchase the location in addition to the business. Thus, the contract falls within the Statute. Sam will continue that he is the person to be charged because Betty is attempting to enforce the contract against him. Moreover, Sam never signed the purchase agreement that Betty mailed to him. Thus, there is no contract. Sufficient Memo Betty will counter that she has a copy of the original agreement that Sam mailed to her. In addition, Sam prepared the papers. Thus, it can be inferred that the name of Sam's business was on the agreement and contained all essential terms of the agreement. Betty's copy will take the contract out of the Statute and it will be enforceable. 40
3. Did Sam violate the covenant? The issues here revolve around the Parol Evidence Rule and whether the court will allow evidence to explain the ambiguity. If the Parol Evidence is admitted and Betty's allowed to introduce her statement that she did not want to have to compete with Sam's ties to his former clients, then the term will likely be interpreted to mean clients, not location. Breach A breach is an unjust failure to perform which goes to the essence of the contract. The issue here will be whether Sam's failure to adhere to the non-compete clause is a major or minor breach. 41